Independent Contractor or Employee?

22 May 2019

One of the biggest issues facing employers in recent years are challenges to employers’ classification of their workers as “independent contractors” as opposed to “employees.”  This is significant issue in many industries, including sales and IT.  

There are many reasons why employers prefer to treat workers as independent contractors rather than employees, including payroll taxes and having to comply with wage statutes and orders, such as minimum wage, overtime, paid meal breaks, and paid time off.  This issue has been a large focus of plaintiffs’ attorneys over the last several years, seeking to recover for amounts that workers should have been paid for working more than “full-time” hours but not being paid overtime pay, not being provided paid meal breaks, and being paid less than the minimum wage required by applicable law.

One of the states in which this has been very heavily litigated is California.  In these cases, workers, for example, claim to have regularly worked more than 8 hours in a day or 40 hours in a week but were paid their regular rate of pay, rather than the overtime rate of 1.5 times.  Employers argue, often having contracts to try to back up their argument, that the workers were independent contractors and agreed to be treated as such. However, an employer merely having a worker sign an agreement saying they are an independent contractor does not control the issue.  Instead, courts look to different tests to determine whether the workers really are independent contractors rather than employees.

In April 2018, the California Supreme Court announced a new test to determine whether workers are independent contractors or employees:  Dynamex Operations West, Inc. v. Superior Court.  In the Dynamex case, the court announced a test that makes it much more difficult for employers to treat their workers as independent contractors.  This test, known as the “ABC” test and used in many other states, requires and employer to prove each of the following:

(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and

(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

In most instances, it is very difficult for an employer to satisfy this test.  For example, in the IT industry, if an IT company takes on a large project for a client and hires workers to staff that project, it will be difficult for that company to meet part “B” since those workers perform work that is within the IT company’s usual business.

Significantly, on May 2, 2019, the federal appeals court for the Ninth Circuit, which covers California, decided an issue that had been left open by the court in the Dynamex case—whether that decision applies going forward or whether it applies retroactively.

In that case, Vazquez v. Jan-Pro Franchising International, Inc., the court decided that the “ABC” test set out by the court in Dynamex applied retroactively.  So, the ABC test applies not only going forward in any cases that are filed in the future, but applies to all cases that are already pending based on worker claims that existed before May 2, 2019.  This was a very significant decision as all employers who are currently facing this issue already are now bound by the “ABC” test.

Because of this decision, employers who use independent contractor agreements to hire works should examine these practices to see if this test is met.

Contributed by:

Andrew Margulis

Partner, Ropers, Majeski, Kohn & Bentley

USA, Europe and Asia

Share to...